Consolidation Post-Acquisition — Reassessing Contingent Consideration

Contingent consideration, often referred to as earn-outs, represents future payments to the seller based on post-acquisition performance metrics or events.

After initial recognition, these arrangements must be remeasured at each reporting date, with changes flowing through earnings or, in limited cases, equity.

1. What is contingent consideration?

Contingent consideration is any part of the purchase price that is conditional on future events or performance milestones. It may take the form of:

• Cash payments linked to EBITDA or revenue targets

• Issuance of shares upon regulatory approval

• Settlement via services, equity instruments, or other assets

It is recognized at fair value on the acquisition date and included in the total consideration transferred.

2. Initial recognition at acquisition date

At T 0, contingent consideration is measured at fair value using either:

• A probability-weighted scenario analysis

• An option-pricing model (e.g., Monte Carlo simulations)

It is classified as:

Classification	Subsequent Measurement	Where Changes Are Reported
Liability (most common)	Remeasured at fair value	Income statement (gain/loss)
Equity (rare cases)	Not remeasured	No future P&L impact

To be classified as equity, the obligation must be settled by fixed number of shares for a fixed amount and meet strict criteria under ASC 480 / IAS 32.

3. Subsequent remeasurement of liabilities

Remeasurement occurs at each reporting date, until settlement. Changes in fair value arise due to:

• Revised probability of achieving targets

• Changes in forecasted performance

• Time value of money (unwinding of discount)

• Updated market or valuation assumptions

Journal entry example — liability increase:

• debit Contingent consideration expense

• credit Contingent consideration liability

If fair value decreases:

• debit Contingent consideration liability

• credit Gain on remeasurement of contingent consideration

These amounts are recognized in earnings, not OCI.

4. Accounting for settlement of contingent consideration

When conditions are met and the payment is made:

• If settled in cash → reduce the liability, credit cash

• If settled in shares → derecognize liability, credit equity

• If payment differs from liability’s carrying amount → recognize a gain or loss

Situation	Accounting Treatment
Performance target met	Pay liability, no further impact on earnings
Underpayment vs. liability booked	Gain in earnings
Overpayment vs. liability booked	Loss in earnings

5. Revisions to contingent consideration terms

Modifications to contingent consideration terms after acquisition must be analyzed carefully:

Type of Change	Accounting Impact
Change due to business combination (T 0 related)	Adjust liability, through earnings
Change due to post-combination agreement	Treated as equity transaction or compensation
Share-based earn-outs tied to employee service	Accounted for under ASC 718 / IFRS 2

Intentional linkage of payments to future employment renders them compensation, not consideration.

6. Disclosures required for contingent consideration

Entities must disclose:

• Description and key terms of contingent consideration

• Fair value at acquisition and at each reporting date

• Amounts recognized in profit or loss during the period

• Valuation techniques and significant unobservable inputs used

• Potential range of outcomes and settlement dates

Example disclosure note:

“As part of the XYZ acquisition, the Group agreed to pay up to $10 million based on 2025 EBITDA. As of year-end, the fair value of the liability was $6.3 million. A $1.2 million fair value increase was recorded in other operating expenses.”

7. IFRS vs. US GAAP differences

Area	US GAAP	IFRS
Classification guidance	ASC 480, ASC 815, ASC 718	IAS 32, IFRS 3, IFRS 2
Remeasurement of liabilities	Required, through P&L	Required, through P&L
Equity classification	Fixed-for-fixed criteria strict	More flexibility in equity-settled terms
Modifications post-acquisition	Compensation vs. business combo	Similar, but case-by-case

Key take-aways

• Contingent consideration is initially measured at fair value and remeasured through earnings unless classified as equity.

• Valuation models must reflect current expectations, probabilities, and discounting.

• Classification as liability vs. equity is critical and affects future remeasurement.

• Disclosures must provide transparency on fair-value changes and expected settlement.